The tax rate applicable to income from a self-employed business primarily depends on how the business is structured. If you’re operating as a sole proprietor or through a partnership, the income is typically considered personal income, and you’ll be taxed at personal income tax rates in accordance with your individual tax bracket. This is because, legally, there is no distinction between you and the business; the income passes directly to you and is reported on your personal tax return.
On the other hand, if you’ve structured your business as a corporation (such as an S Corporation or a C Corporation, depending on the country and specific election made), the tax implications change. A C Corporation is taxed at the corporate tax rate, and any dividends you receive from the corporation could also be subject to personal tax, leading to a scenario known as double taxation. An S Corporation, however, allows income to pass through to owners and be taxed at personal rates, avoiding double taxation.
It’s also crucial to consider that different jurisdictions have different tax laws and regulations, which may affect your specific situation. Therefore, consulting with a tax professional or an accountant with expertise in self-employment and corporate law is advisable to ensure compliance and optimize your tax obligations.